Pakistan’s economic growth is projected to shrink to 2.6 per cent in 2020 from 3.3 per cent in 2019, while inflation will remain around 11.5 per cent for 2020, the Asian Development Bank (ADB) said in in its latest report.
According to the Manila headquartered multilateral lender, the COVID-19 outbreak would pose a downside risk to growth prospects as it further dampened consumer demand and as private businesses were temporarily shut down in efforts to control the pandemic.
The ADB report said weaker demand under Covid-19 could adversely affect exports.
“Economic growth in Pakistan is expected to slow down to 2.6 per cent this year due to ongoing stabilisation efforts, slower growth in agriculture and the impact of the Covid-19 outbreak, before recovering to 3.2 per cent in 2021,” said the ADB.
The report said agriculture is expected to see slow growth in fiscal year 2020 as the worst locust infestation in over two decades damages harvests of cotton, wheat, and other major crops. It expects modest growth in some export-oriented industries, such as textiles and leather. But, large-scale manufacturing, which provides over half of industrial production, will likely to contract, as it did in the first half of 2020.
Double digit inflation
The ADB report said that the inflation would be fueled by escalating food prices, scheduled hikes to utility rates, and domestic currency depreciation.
“Inflation is projected to accelerate to 11.5 per cent in FY2020, reflecting a sharp rise in food prices in the first part of the fiscal year and a 9.8 per cent drop in the value of the local currency against the US dollar in the first 7 months of FY2020,” said a press release issued by ADB.
The State Bank of Pakistan, the central bank, raised its policy interest rate by a cumulative 575 basis points to 12.25 per cent at the end of FY2019 to counter inflationary pressures. Following the decline in global oil prices and expected sluggish demand under COVID-19, the State Bank of Pakistan reduced it in two steps to 11 per cent in March 2020.
The ADB report expects inflation rate to moderate to single-digits in 2021 to 8.3 per cent. At a growth rate of 2.6%, Pakistan will be the sixth slowest growing economy in South Asia, trailed by Sri Lanka and the Maldives.
ADB noted that Although Pakistan’s strong policy measures in recent years have started to yield positive results in reversing macroeconomic imbalances and narrowing current account deficit, country needs to focus on the new challenges posed by Covid-19, such as uncertain short-term growth prospects and socioeconomic repercussions.